Weetas real estate report: overview on the market in light of the crisis

Still GCC countries are totally depending on hydrocarbons exportation revenues in composing its annual budgets and establishing major economic development projects.

However, we have to admit that concentration on economic diversification policies became greater than before as various economic sectors became emerging on the scene like for example tourism, agriculture, industry, and real estate.

Petroleum, market pivot

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The huge urban development all around GCC areas after the discovery of oil wells motivated the activity of real estate investment to be one of Gulf economies pillars.

Oil revenues enabled GCC countries to expand their urbanization and cities construction process to consist with the latest international standards. The radical difference which took place in many locations like Dubai, Abu Dhabi, Jeddah, and Riyadh in relatively short period contributed in promoting real estate investment in Gulf to become renowned globally.

Oil revenues still represent the biggest shares in gulf countries budget composing 90% in Saudi Arabia and merely 93% in Kuwait, that’s why oil is considered the main controller of governmental expenditure rates, the higher oil revenues rise, the more generous governments will get on economic sectors including real estate sector.

Additional factors

Besides oil revenues, there are other economic factors that contributed in propping real estate like for example tourism activity. Tourists’ influx on Dubai, Abu Dhabi, Bahrain, and Oman Sultanate had a great hand in attracting real estate investments in many fields including retail, hospitality, and residence.

Hosting important events is also considered a real estate catalyst. Qatar is preparing to host the football world cup in 2022, also, Dubai is organizing the globally-renowned Expo 2020.

Holding such events requires founding a strong ground of solid infrastructure in addition to various hospitality and retail projects to accommodate the flocks of tourists expected to come which will absolutely spur growth rates.

The hiking population growth rates is also another key factor. High growth rates mean high demand rates on residence especially from youth who constitute around 50% of GCC residents (57% in Kuwait and 60% in Saudi Arabia).

Governments’ role

GCC government bear upon themselves creating the suitable environment for attracting foreign, regional, and even domestic investments. Governments work on developing infrastructure by extending railways, creating better transportation means, improving facilities’ efficiencies, and providing equipment and building materials.

Governments pass needed legislation to organize the markets and stabilize them to be safer. 2015 witnessed issuing many real estate laws like the real estate development law in Bahrain which organizes properties development and investment and puts an end to the stalled projects phenomenon.

Saudi Arabia also passed the undeveloped lands taxation and the mortgages minimum deposit values law.

UAE passed a bundle of laws aiming to avoid the creation of market bubbles and to limit speculations including a law entitling realtors and developers to carry practice licenses and another law that ensures the rights of on-plan properties buyers.

The oil crisis

By the end of 2014, oil prices started falling apart from 110 dollars per barrel in June 2014 to reach 35 dollars on the meantime.

Some experts attributed the prices decline to the supply surplus and the slow economic growth rates in Europe, China, and Brazil who are considered the biggest consumers.

Despite the prices fall, the Organization of the Petroleum Exporting Countries (OPEC) refused reducing production rates to level the market which added salt to injury. The decision aims at expelling marginal producers who benefitted from oil high prices in the latter period, it aims also at weakening shale oil production process.

The crisis percussions scale varied from one country to another. Oil producers suffer from the low revenues pouring in their coffers especially countries like Russia, Libya, Algeria, and Iraq.

On contrary, the oil crisis benefitted to some extent the oil consumers as it softened hydrocarbon products bills a little bit. This led to decreasing staples prices and reducing inflation rates in many countries like China, France, Japan, and India.

You can read also:

Relation between oil cirses and Gulf real estate market (Infographic)

Oil crisis and Gulf real estate markets

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No doubt the plummeting oil prices will have a deep impact on gulf economies especially if they kept on this trend. It became evident that GCC states have been affected especially by announcing their annual budget which witnessed deficiencies for the first time in years.

Saudi Arabia announced that its budget deficiency reached 98 billion dollars, Kuwait’s, in turn, had 27.8 billion dollars deficiency. Analysts estimated the total budget deficiency in GCC this year to reach 122 billion dollars.

On a larger scope, GCC real estate market remained solid as properties prices of all sorts stayed put despite the turbulences. This goes back to the hiking demand rates either from individual buyers, local investors, or foreign investors in the major markets like Dubai, Abu Dhabi, and Qatar.

The governments’ orientation to building major real estate projects like King Abdullah Economic City in KSA and infrastructure projects in Qatar contributed also in fixing the market.

The economic diversification policy and the concentration on building various economic and industrial zones in many localities around GCC in addition to facilitating companies’ foundation processes contributed also in stabilizing the market. This policy had a great hand in founding new job opportunities which propped demand on buying or renting properties.

There are also other additional factors like the recently passed laws and legislation which stand as a precaution of market bubbles to avoid the remittance of the 2008-2009 crisis.

The following part will include some details about real estate markets in Saudi Arabia, UAE, and Bahrain.

Bahrain

Bahrain’s budget, like its counterparts of GCC states, depend on oil production revenues. The discovery of oil in Bahrain in the middle of last century spurred building and construction activities in Bahrain on a large scale to coincide with the kingdom’s general economic advancement.

Bahrainis, like their Khaliji brothers, now live in contemporary modern houses and urban areas and abandoned gradually the traditional way of living known about the Arabian Peninsula.

Total oil dependency urged Bahrain leadership to look for other sources of income. That’s why the government took upon itself studying Bahrain’s potentials and strength points that could be exploited.

Bahrain’s location in the heart of Gulf area made it a trade gate for the whole region, it turned it also to a touristic attraction point for Khaliji and foreign visitors. That’s why focus became more on establishing new hotels, retail centers, and resorts which stirred real estate activity in the Kingdom.

Bahrain succeeded in attracting many visitors, especially from the surrounding areas. KSA alone has around 2 million tourists who visit Bahrain every year. However, the activity of these sectors continued depending on oil revenues being the prime sponsor of government’s future development plans.

By the turn of the new century, Bahrain headed toward attracting more foreign real estate investments as it decided to define freehold location for foreign buyers including Durrat Al Bahrain, Amwaj Island, Juffair, and other locations.

This decision had a positive impact on trading activity in the market as deals number and value hiked since then exceeding 1 billion dinars for the first time.

Oil prices recession

Real estate sector, and Bahrain economy as a whole, were affected by prices recession. Properties prices and trading rates settled after two exceptional years. However, recession in Bahrain was less severe than UAE and KSA.

Economic growth rate in the Kingdom declined to 4% compared to 4.9% last year. Rents prices settled especially in major residential areas like Adliya and Saar.

Also, rents prices settled in upscale areas dominated by high-income earners like Amwaj Island and Reef.

Despite rents decline and the poor economic performance, sales prices remained solid, especially residential properties prices.

[Check more info about Bahrain rents prices here: Rents prices in Bahrain survive financial impacts, why?]

Expectations

Lack of supply, population growth, and influx of tourists are still of the main incentives leveling market prices until now. We could even see that some areas witnessed slight rise in prices like Juffair for instance where prices reached 60 BHD per foot.

Prices are expected to remain solid, however, on the longer extent, prices are predicted to start declining gradually amidst the decline of Khalijis’ real estate investments in the kingdom and the drop in governmental expenditure on infrastructure projects.

Bahrain will remain, despite the difficulties and ordeals, a promising real estate market that gains the trust of many regional, foreign, and domestic investors.

[For more about Bahrain real estate check: Bahrain real estate: Stable despite fluctuations]

Saudi Arabia

The biggest oil producer where hydrocarbon production constitutes 90% of the state’s revenues. Statistics estimate that Saudi Arabia has the second biggest oil reserve in the world after Venezuela.

Saudi efforts in economic diversification became evident these days amidst the prices plunge. The kingdom issue new taxation on undeveloped land parcels located in urban areas in an attempt to exploit unused parcels either by selling or developing which will have a big impact on the domestic market there.

Between the major projects being established in Saudi Arabia for sake of diversifying economic resources there is King Abdullah Economic City being built on a total space of 180 km square.

The project offers industrial and residential solutions by establishing seven residential compounds suitable to accommodate more than 50,000 individuals in the coming 5 years and 2,000,000 people by the project completion in 2035.

Real estate sector expectations in KSA

Real estate experts think that the budget deficiency announced will have only a slight impact on the economic performance due to the availability of strong cash reserve.

Thus, the Saudi government earmarked 183 billion riyals for covering any potential deficiency in revenues as a result of oil fluctuations which makes establishing new projects available.

Upon the current exponential growth of real estate sector in KSA, it’s hard to assume that oil prices plunge will have a negative impact on the sector especially amid the increasing investments in developmental projects scattered around the kingdom.

Mortgages weren’t affected also due to financial institutions’ insurance procedures based on clients’ solvency, which ensures that KSA is still far from witnessing any real turbulences in real estate market.

Properties could be the best resort of investors’ funds especially that gold and silver prices are declining same as many other commodities.

Saudi analysts believe that there is no correlation between oil prices and properties due to the high demand rates witnessed in the market, in addition to the governmental procedures taken to stir expenditure on pivotal projects which reassure more investors to pour their funds in the real estate market.

UAE

UAE as the least affected country by the oil plunge due to its solid economy depending on tourism and industry in the first place.

We will mention in detail the effect of the crisis on properties sector

The crisis impact

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UAE government liberalized the prices of gas and diesel and cancelled its subsidization of both products to leave gas prices soaring to 2.14 dirhams from 1.72 dirhams rising by 24%.

The government approved also raising water and electricity fees as a part of the state’s comprehensive plan to reduce the subsidization budget.

Impact on real estate

In Abu Dhabi prices dropped by 0.2% in the second quarter of 2015.

Dubai, properties transactions rate remained stable during 2015, there were no real change in apartments’ average prices also during the first half of 2015, only decreasing by 0.6% in the period between January and June.

By the second quarter of the year, rents prices declined by 0.9% while villas rents declined by only 1%.

In Sharjah, the state registered 2.3% decline in rents average. Apartments rents values decreased by 4.2% while villas rents declined slightly by 1.4%.

The decline in prices left some projects stalled, other delayed in delivering their units which could foretell a real estate problem in the emirate.

As evident from data, Sharjah was the most affected from oil crisis compared to Abu Dhabi and Dubai which remained exceedingly solid.
Future forecasts

It’s worth mentioning that the economic diversity in UAE kept it bit immune. Despite the pessimistic forecasts by the beginning of the crisis, UAE markets remained solvent and proved its ability in absorbing the hits.

A budget deficiency was expected in UAE, while on contrary, the emirates union government was able to raise expenditure by 12% without witnessing any deficiency in any sector.

The government expect growth rates to remain sustainable if expenditure rates remained stable and governmental decisions of limiting the crisis impacts were applied.

Dubai and Abu Dhabi, both witnessed slight turbulences in sales and rents prices. However, launching new projects and the population growth rates in both emirates softened the crisis sores.

At last… a silver lining

There is no doubt that the current crisis won’t continue forever, however, it’s pretty sure also that oil prices won’t return to previous rates. Some experts expect that prices upon recovery will range between 60 and 70 dollars which is lower than 2014 prices by 40 dollars.

This will contribute in shaping a new reality on the world economic map. The main proportions of this reality is the end of oil era and the start of a new one shaped by resourceful economies.

Thus, economic leadership should focus more on diversifying economy’s resources and concentrating on alternatives that hold huge potential like real estate. That’s why this crisis stands as a wake-up alarm alerting to the necessity of moving forward toward more solvent economic reformations.

Real estate could thrust the market’s mobility towards real advancement especially if it was well-exploited especially that GCC states have strong capabilities including the availability of liquidity, political and economic stability, and resources.